Your options for funding business growth
Setting up and growing a business takes good financial management. Your cash flow, savings and debt levels all play a part in how well your business performs, and how quickly and large you can grow.
If you want to expand, upgrade or make purchases, you need to weigh up the cost against the return, especially if it means taking on debt.
What will extra funding help to achieve?
There are a few questions you need to ask yourself before you look for additional funding including:
- How much do you need?
- What do you plan to use it for?
- What are you prepared to sacrifice to get additional funding?
- How much risk are you prepared to take on?
- Do you need to manage fluctuations in your cash flow?
What kind of financing options are available?
There are several options to consider when looking at finance to grow your business, including:
- using equity in your home
- bringing on a new investor or partner
- applying for development grants
- taking out a small business loan.
Using the equity in your home
One of the lowest cost sources of funding available is using the equity in your home. The risk in using the equity from your family home is that you could quite possibly lose your home if the business doesn’t perform as expected.
Before you go forward with this option it’s important to think about how your family could be affected if things don’t go to plan. You also need to ensure that anyone who is a co-owner of the house is aware of the risks and supportive of the decision.
Bring on a new investor or partner
Bringing a new partner or investor on-board might enable you to secure the funding you’re after, as well as giving you someone to share business responsibilities, decision making and risk with.
Inviting a new person into your company is a substantial commitment financially. A new partner or investor may require you to make changes to the way you currently operate, so make sure you’ve done background checks and have verified your candidate’s credentials before you make an offer.
Applying for development grants
Local or national government assistance and funding can be made available to businesses that meet certain conditions or criteria. Your business may qualify to apply for some development grants or incentives that are on offer.
To find out more about grant or funding opportunities go to the business.govt.nz website.
Getting a small business loan
Generally you should consider a business loan only if you think the loan will improve the net value of your business over time.
Before you borrow money, it’s important to understand the difference between good debt and bad debt. Good debt can help to increase your net worth or generate value, such as borrowing to buy property or fund further training. Bad debt, on the other hand, is borrowing to invest in something that results in your net value declining, such as a car loan.
You’ll also need to think about whether you would prefer a fixed or variable interest rate, what kind of loan security you’d be able to provide, and whether you’ll have to pay one-off fees, regular fees or both.
Fixed or variable interest?
Your interest rate will affect your repayments, the overall cost of the loan and the loan features available. With a fixed rate loan, you won’t have to worry about interest rate moves, but with a variable rate, your repayments can increase or decrease.
The choice of variable or fixed rates may depend on how much cash flow your business generates after you have paid all your expenses, including loan repayments. If your cash flow is in doubt, a variable rate loan repayment could rise beyond what you can afford.
What security can you provide?
Business loans can be secured by assets like residential, commercial or rural property, as well as business assets. There may also be unsecured loans available, but they’ll have much higher interest rates.
It’s important to note that the lender has the legal right to seize any security you’ve offered if you’re unable to repay a loan.
What fees will you have to consider?
Depending on the type of loan you get, there could be one-off fees that you need to factor in to your business expenses. Fees could include establishment or application fees, or exit or discharge fees. There could also be regular service fees or account fees.